Our Biggest Mistake

Our biggest FINANCIAL mistake that is. Before we fully developed our super powers, we mostly subscribed to the belief that a house is one of the best investments you can make. Our friends, family and coworkers all had the same belief and so did we…

“Buy low and sell high and you can’t go wrong!”

As mentioned before, we got incredibly lucky in the timing of when we bought our house (100% down too). We bought at the beginning of 2012 in what many would argue to be the “bottom” of the housing market before the recovery.

We bought our 2,700 sq. foot monstrosity for $515,000 which was probably close to $50,000 under-market at the time. And over the last 5.5 years we have seen a steady increase in value due to the automatic emails Zillow sends us every quarter or so. Today Zillow estimates our home to be worth $690,000! Given the many recent sales within our neighborhood this is entirely reasonable and possible. Let’s take a closer look at the numbers:

Wow! What a great “investment” we made!… or so we thought.

If you will learn anything about us, it is that we tend to over analyze our decisions (like way over analyze) so that we can learn from them and determine our next steps. You see when you buy or sell a house, there is a whole line of people looking for their cut of the action.

You have the realtors taking their typical 6% cut (you don’t have to worry about this on the buyers side, but you will when you ultimately sell).

Then you have lawyers, inspectors and government / county feeds for the right to sell your own property to consider.

Our state has a .456% transfer fee on the sales price of the home!

And finally, as an owner you actually have to maintain your house yourself; new roof, work on the furnace, plumbing. If you aren’t doing it yourself that is typically 1% of the value of the house each year!

So let’s look at the real numbers now:

But even with all those costs, we did pretty well and made a profit. We didn’t take out loans, so we don’t have to worry about interest to banks, or paying fees simply for the privilege of paying them interest.

We won the house game and can call it a day. Done right?

WRONG! We decided to do a thought experiment and tried to map out what it would look like if we NEVER bought the house, continued renting and took the $515,000 and invested it all in low expense index funds (S&P). The comparison blew our minds.

On the day we bought our house, the share price for the index fund we typically use for S&P (IVV) was at $131.91 a share. Today its at $248.62 a share.

That doesn’t include the dividends we would have received over those 5.5 years though. We would have received quarterly checks that would have added up to nearly $80,000 over the course of 5.5 years.

After taxes we would have netted $63K in dividends alone. The principal of the investments would have gained us another $455,657 on top of that. Now if we wanted to cash out the principal, we would have to pay capital gains taxes. So let’s factor that in.

“Parallel universe us” is kicking the crap out of us by not buying. They made $428K versus “This universe us” who only made $94K in the same period of time.

I can already hear it, “but FI Guy you are missing the most important part of the equation! What about all the rent you didn’t have to pay while you owned a house for the last 5.5 years?”

Oh you are right! Too bad we were actually paying rent all the time while owning our house; It’s called town taxes! Let’s readjust both sides to make them fairer, starting with the house.

Along with the taxes, we had to pay our own heat and this fun thing called home insurance.

Now at the time of our house sale we were paying $1200 per month including heat and hot water to live in a 500 square foot 1 bedroom apartment. Let’s say we stopped roughing it so much and upgraded to a larger 2 bedroom apartment that went for an average $2,000 per month over the same period. Even though we are in a palace, we essentially live out of 2 rooms in the small amount of time we are actually home and not working.

Now to do the fair comparison:

I’m thoroughly convinced that buying the house (an action that didn’t really increase our happiness level) was the BIGGEST FINANCIAL MISTAKE we have made in our adult lives (so far).

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